For private firm, Altman adjusts the public model by changing the numerator for the variable X4 from the market value of equity to the book value of equity. The revised model follows:

Z = .717 (X1) + .847 (X2) + 3.11 (X3) + .420 X4 + .998 (X5)

Where:

X1 = Net Working Capital/Total assets

X2 = Retained Earnings/Total Asset

X3 = Earnings before interest and taxes/Total Assets

X4 = Book value of equity/Book value of Total Liabilities

X5 = Sales/Total Assets

The model predict bankruptcy when Z < 1.23. The range between 1.23 and 2.90 is labeled the grey area. The following table presents the independent variables from the three companies at the end of 2011.

Independent Variable ABC, Inc. KLM, Inc. XYZ, Inc.

X1 0.075 - 0.115 - 0.321

X2 0.767 0.895 0.605

X3 0.095 - 0.075 - 0.108

X4 2.500 1.250 1.125

X5 0.900 1.286 0.710

a) Calculate Altman Z-score for each company and interpret the results.

b) Calculate the debt ratio for each of the companies.

c) Explain the impact of increase debt ratio to Altman Z-score.